Light touch regime

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Belgium's regulator tells George Coats about the thinking behind Belgium's new pensions framework and how he will police it

Belgium has risen to the challenge thrown down by the EU's IORP directive, according to Henk Becquaert (pictured right), head of the pension department in the Belgian financial sector supervisory authority, the Banking, Finance and Insurance Commission (CBFA).

"The real meaning of the directive was to encourage companies employing workers in several countries to create a real pan-European pension fund based in one member state," he says. Belgium's answer is the new OFP vehicle.

In what might be seen as a reflection of its potential, the Dutch regulatory authority attacked it shortly after it was unveiled.

It took the Dutch authorities by surprise, Becquaert says. "I don't think they expected us to come up with a new law that was appealing enough to attract pan-European pension funds and, because we are neighbours, perhaps prove attractive enough for some Dutch pension funds to come to Belgium. I think they thought we might be attracted to their system rather than the other way round but our flexible new law has all the attractive elements that their pension system asked from their government but have not yet received."

Becquaert has been closely involved with the pensions issue for more than a decade. He has been an adviser to several Belgian pensions ministers and was one of the architects of the Vandenbroucke law, which was intended to widen second pillar participation by encouraging sector-wide pension schemes. In early 2005 he resigned as principal private secretary to the then pensions minister Bruno Tobback to join the CBFA.

He may be forgiven for enjoying a sense of Schadenfreude. When the Belgian legislation was announced the Dutch response was both condescending and erroneous. "Before they had examined our new legislation they made comments based on a previous law," Becquaert says. "So their arguments were incorrect and it created a difficult situation."

However, the Belgians did not want a confrontation. "We didn't want to go to the Dutch and say they were wrong," Becquaert says. "We wanted to take a lower key approach by explaining the new system to their companies, pension funds and the Dutch National Bank, their regulator. Nevertheless, it took one year before they began to understand that our law was not as they had claimed."

But now all that is water down the dike. Becquaert's focus is setting up the mechanisms to police the new regulatory framework and to ensure that the OFP is as attractive as possible to bring pan-European pension funds to Belgium.

"There are different elements to the new regime," he says. "We had the legislation, then we had a document on the governance of pension funds and now we are discussing with the sector how to integrate the new law into the prudential method of calculating the technical provisions."

This is proving problematic because pension funds are used to working within a quantitative framework when calculating technical provisions but the new Belgian system has turned its back on this.

"Our new law adopted the prudent man approach of the EU's IORP directive, and although a lot of countries have done the same they have continued to apply a quantitative framework. We don't have this, the only quantitative elements in our law are those provided for in the EU directive. We say because it is prudent man, you have to make your own calculations, you have to make your own assumptions and then you have to explain to us why it is prudent. And we will give a red or green light, or maybe an orange light when we want them to change something.

"Of course, we are having discussions with the sector on what we expect from the prudent man approach but we won't go with a quantitative framework on how to tackle this."

Belgian pension funds have until 1 January 2012 to form themselves into an OFP, says Becquaert. "But half have already done it," he adds.

There have been complaints that Belgium's smaller pension funds will have difficulties complying with the CBFA's new regulatory structure. Becquaert thinks their concerns are groundless. "If they take on board what we are trying to explain to them they can tackle all the problems," he says.

"We can take into account whether they are big, small or very small. They have to provide us with a plan of how they wish to organise and how they want to tackle the questions we ask, how they will organise their internal control, which need not be so big an issue for a small player, and how they will undertake compliance, which need not be very difficult if there are only a few people in the fund. We are trying to convince them that what we ask is the minimum necessary to run a decent pension fund and we are open to discussion.

"Of course, I have to be frank; we have a handful pension funds where we have to consider whether we can let them continue. These are the ones that forget to report each year and they neglect to answer the main questions we ask so there is a big problem. But there are very few, less than 10, where we have major difficulties.

"And when considering the creation of pan-European pension funds we see that pension systems are quite different from country to country so they are very difficult to compare. In some the role of the sponsor is very important, in others not; in some you have overwhelmingly DB with index-linked annuities not lump sums while others only have DC with lump sums. So we have designed a flexible prudential law that can accommodate all of these possibilities.

"Again, we take into account whether a pension fund is large or small and the specifics of the pension system behind it. What we require is that it at least has a general assembly and a board, and in addition it must have a system of internal control, auditing, compliance and so on. But we can show a degree of accommodation.

"If a large multinational wants to create its own pan-European pension fund here, the compliance and audit can be undertaken by the sponsor. Of course the members of the board have to be fit and proper and the outsourcing of control has to comply to our standards. They have to follow our rules and we want to see they have done the necessary work, so they have to make the required reports, with an internal auditor and the internal control. But they don't have to hire people within the pension fund to do that.

"Similarly the OFP is a flexible organism because now we have pension funds that have several million euros under management and in the future we expect to have pension funds with many billions of euros, and it's quite different to manage a large fund compared with a small one."

But while people have been talking about multinationals basing their pension funds in Belgium, have any shown any real interest in doing so?

"Yes," says Becquaert. "I have had contacts and they are looking at it. As an initial step they have to move to an OFP, perhaps creating one for all their existing Belgian pension funds. I see two types of company for which this will be particularly attractive.

"First there are those operating in new markets, where a group has workers in several countries that it wants to give a supplementary pension. The company will not want to create a fund or take out a group insurance in all these countries. Rather, it can bring them into a Belgian-based pan-European pension fund. This is certainly attractive for those with operations in eastern Europe.

"The second set of contacts has been from companies considering creating a pan-European pension fund in Belgium for their mobile workers, their experts. There are large groups that are working on presenting a file to us and we will see progress in the next few years."

But are any Dutch? "I don't think we will see any Dutch industry-wide pension funds, the big funds, coming to Belgium," says Becquaert. "And we did not expect any to do so when we introduced our new law. I know there were questions in Holland about when ABP or other major funds would go to Belgium, but we don't want to attract them. However, there will be interest from some companies that have their own pension fund. I know some will do that but it will take some time so it's premature to go into details."

Asked about the challenges he faces in the foreseeable future, Becquaert is upbeat. "A major challenge would be if in a few months a large number of companies decided to come to Belgium," he says. "It would introduce a lot of work to the regulator, this would be a really big challenge but it would be a nice one."